Reflecting on consumer preferences

This blog by Brian McGraw for GlobalWarming.org discusses a new paper by the Mercatus Center.  The Mercatus Center released a paper (PDF) this month co-authored by Ted Gayer (an economist at the Brooking Institution) and W. Kip Viscusi (an economics professor at Vanderbilt), titled “Overriding Consumer Preferences with Energy Regulations” which questions the economic justification for various government schemes implemented to force energy efficiency improvements in consumer household products, automobiles, lightbulbs, etc.

Consumer Preferences Versus Energy Efficiency Regulations

This paper examines the economic justification for recent U.S. energy regulations proposed or enacted by the U.S. Department of Energy, the U.S. Department of Transportation, and the U.S. Environmental Protection Agency. The case studies include mileage requirements for motor vehicles and energy-efficiency standards for clothes dryers, room air conditioners, and light bulbs. The main findings are that the standards have a negligible effect on greenhouse gases and the preponderance of the estimated benefits stems from private benefits to consumers, based on the regulators’ presumption of consumer irrationality.

The paper walks through the basic economic understanding of consumer rationality, and explains why behavioral critiques of consumer rationality fail to undermine the general conclusion that consumers are overwhelmingly rational and tend to act in their own best interest, and that “in most contexts consumers are better equipped than analysts or policymakers to make market decisions that affect themselves.”

The authors state that benefit cost analysis (BCA) conducted by government agencies in support of these policies (fuel standards, consumer appliance efficiency, etc.) make unwarranted assumptions, including the assumption that the energy efficiency of the product should trump other considerations, such as the up front cost:

As our discussion in this paper indicates, government agencies do not properly assess the benefits from energy-efficiency standards. They assume consumers and, in some cases, firms are incapable of making rational decisions and that regulatory policy should be governed by the myopic objective of energy efficiency to the exclusion of other product attributes. Energy efficiency standards provide a valuable case study of how agencies can be blinded by parochial interests to assume not only that their mandate trumps all other concerns but also that economic actors outside of the agency are completely incapable of making sound decisions. The assumption that the world outside the agency is irrational is a direct consequence of the agencies’ view that energy efficiency is always the paramount product attribute and that choices made on any other basis must be fundamentally flawed.

This paper is important because there exists a general scorn from left leaning policy groups towards anyone who dares question the wisdom of energy efficiency programs, including the recently introduced CAFE standards which will require that automobiles meet previously unheard of fuel mileage standards by 2025. Libertarians and market oriented folks are dismissed as right-wing cranks by those who are more supportive of government intervention into the economy, and yet there remains a strong and sound argument against narrowly tailored regulations designed to nudge consumers towards making different choices.